NEW RULES TO STABILISE EUROZONE

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BORIS SCHLOSSBERG
DIRECTOR OF CURRENCY RESEARCH, GFT

The euro is a currency without a country and that has always been its weakness. Its members share a common monetary plan but practise disparate fiscal policies – a structure which has been sorely tested by the Greek crisis. But after Greece agreed to austerity measures, the immediate danger appears to have passed.

Now that markets have stabilised, several Eurozone members are proposing reforms to provide better tools for the future. Some of the ideas included the creation of a European Monetary Fund to issue bailout packages, a European debt issuance authority that would have the backing of the whole region rather than just individual states, and a European debt rating agency.

There is no doubt that many of the proposals will be met with scepticism by critics who continue to doubt the euro experiment. But the events of the past week have shown that, at least for now, there is strong degree of solidarity in the Eurozone. Officials realise that, despite its shortcomings, a single currency is far superior to the Balkanised markets that preceded it. For those who scoff at the instability of the EU, I need only to point out that California – which dwarfs Greece in economic importance – is on the verge of the same type of crisis that has befallen the Hellenic Republic.

By considering pan-European institutions to better unify the region’s fiscal and monetary policies, Eurozone policymakers are making a serious effort to address capital market concerns. The Greek crisis appears to have peaked for now, and as confidence returns to the debt markets, the euro, which has found support at the $1.3400 level, should begin to benefit from better demand.

Boris Schlossberg and Kathy Lien are directors of currency research at GFT. Read commentary at www.GFTUK.com/commentary or e-mail
@gftuk.com.